What is a call auction?
A call auction, or call market, is where market participants place orders to buy or sell at a certain bid or offered prices (ask), which are then grouped and combined at predetermined time intervals. Orders collected during a call auction are all executed at the price that forms the best overall combination. Call auction rules may vary by exchange.
- In a call auction, bids and bids are aggregated and combined with each other and then run at predetermined intervals at the best price.
- Rather than trading continuously throughout the day, a call auction pools small orders for larger trades in which participants reach a single price.
- By putting many orders together in lots that are then traded at specific times, a call auction maintains cash flow and can reduce transaction costs for traders.
- An example of a sight auction would be the opening or closing rotation of a share on a stock exchange by a specialist.
Understanding per call auctions
In the stock market, a demand auction replaces the method of continually matching orders. Buyers set a maximum price at which they will buy the shares and sellers set a minimum price at which they are willing to sell the shares.
Most of the major stock markets open and close trades with a sight auction, while a continuous trading market operates the remainder of the day. Call up batch order auctions to create large multilateral exchanges where buyers and sellers reach a single price.
In a traditional call auction, an auctioneer “calls” to request buy and sell orders for a security and then bundles them for execution at specific times during a trading day. The auctioneer’s job is to better match the supply and demand of a security to arrive at an offset price.
All buy and sell market orders will be executed at that clearing price. The auctioneer will execute limit orders to buy at or below the clearing price and limit orders to sell at or above the clearing price.
Sight markets are useful for illiquid securities or assets.
Benefits of a per call auction
An electronic call auction authorizes purchase and sale orders for a given asset at predetermined times. By grouping many transactions together, a call market increases liquidity and can significantly lower transaction costs for participants. As an alternative market structure, call auctions impact order flow and handling decisions, price discovery, and market transparency.
Orders that are submitted in batches to call auctions are “priced” orders, which means that all orders are limited orders; there are no market orders involved. In contrast, in continuous trading, limit orders are only traded at their limit prices when market prices trigger the limit.
In the call auction, however, the prices can improve for everyone. For example, a buy order on a call may include $ 20.50 as the maximum price to pay, but it is actually executed at $ 20.40. Meanwhile, a seller may have had the lowest price cap of $ 20.30, but received $ 20.40 in the call auction.
On-demand auctions are more liquid than continuous trading markets, while continuous trading markets provide participants with greater flexibility.
Call auctions vs. continuous trading
In a continuous trading market, traders can trade at any time when the market is open. Buyers and sellers place their orders continuously and are paired continuously. Most of the markets we see today, including stock exchanges, derivatives exchanges, and the forex market, are continually trading markets.
In a call auction, trades are instead executed according to an order-driven system. They use single price auctions that match buyers and sellers orders and then a single trade price is chosen that will maximize volume.
Both types of markets have their own advantages and disadvantages. The biggest advantage of a call auction is that it provides high liquidity, since all traders interested in a security must carry out their operations at the same time and in the same place. Meanwhile, continuous markets give traders the flexibility to trade whenever they want.
Example of a call auction
A demand auction begins on an illiquid share that will trade at 1:00 pm EST. The stock specialist collects the following buy and sell orders in advance:
- Buy 50 shares at $ 885
- Buy 75 shares at $ 875
- Buy 100 shares at $ 870
- Sell 100 shares at $ 870
- Sell 75 shares at $ 880
- Sell 50 shares at $ 890
The best combination is decided at $ 870 per share. This is the purchase price that is executed for all the orders that have been grouped at that time.